Dubai's Debt Troubles: Beginning of the Next Leg Down?

Posted by Gail the Actuary on November 29, 2009 - 11:45am

Most of us have heard that Dubai World is asking for a six month delay in paying back its debt. The debt was supposedly backed by the Dubai government, so Standard & Poor's considers this a default of the Dubai government.

Dubai World Island, formed of manmade islands. Planned to be a residence for 12,000 people. (Dubai Travel Guide)

It is a little early to see how the Dubai situation will play out, but it seems to me that there is a significant chance that the Dubai situation will mark the beginning of the next leg down in the downward recessionary spiral and world debt unwind. Oil prices are likely to drop, so few are likely to notice that oil ultimately plays a major role in the continuing debacle.

Dubai by Itself

The Dubai situation is complicated, which is part of the reason why the restructuring of Dubai World's debt took the world by surprise. Dubai World, the conglomerate behind a huge number of commercial and residential buildings, is the one whose debt is being restructured. The amount of the restructured debt for Dubai World is only about $60 billion, so by itself, is insignificant compared to the size of the world economy. The government of Dubai backs the Dubai World debt. If one includes the government of Dubai, total debts are about $80 billion, which is still not a huge amount compared to world assets.

Dubai doesn't have much oil. It also doesn't have much water, or much arable land either. It is a major financial center, and would like to expand in that role. But without a growing world oil supply (or at least growing Middle-East oil supply), it is difficult to see how continuing growth might happen. Dubai's property values have dropped in the past year and vacancies are a significant issue.

If one knows about peak oil, it is pretty easy to see where Dubai World is headed, over not too long a timeframe. The energy intense plan it has put together is not sustainable for very long. Except for financial services, Dubai does not have much to sell. Financial services generally depend on growth, and in particular growth in debt, but this does not seem really sustainable either, unless extracted resources can provide the needed growth--something that seems increasingly less likely.

Bailout for Dubai?

Based on the above description, a bailout for Dubai is at best a temporary band-aid. Dubai is part of the United Arab Emirates (UAE), and Abu Dhabi is the senior partner in the UAE. Unlike Dubai, Abu Dhabi has significant oil reserves and has a huge sovereign wealth fund. According to the Independent:

As with Iceland, the Ukraine, Hungary and many other states, Dubai can and should be saved. The damage is containable. Aid must come from Dubai’s partners in the United Arab Emirates, especially oil-rich Abu Dhabi; from the Gulf Cooperation Council, dominated by Saudi Arabia; and from the IMF. Abu Dhabi’s sovereign wealth fund alone is worth about $700bn, the biggest in the world. So the funds are there to organise some sort of rescue; the political will must be found.

So there seem to be funds available. But the question is: will others really want to put more money into what is fairly clearly a sinking ship, especially if one understands the world oil situation?

In the absence of a bail out, the interest rates of the whole region are likely to go up, and this may put more pressure on Abu Dhabi or the Gulf Cooperation Council. But if there is a bankruptcy, the assets may become available very cheaply. This countervailing incentive may ultimately win--we don't know yet.

Also, the amount of bailout that is needed may be less than $60 billion. If the bailout applies only to the bonds whose date is currently being extended, the funding requirement could be as little as $22 billion.

Parallels to Dubai

One can think of quite a few parallels to Dubai. The fact that there are so many parallels is what makes it easy for the fallout from Dubai to spread widely.

Subprime

In some ways, Dubai World is equivalent to the sub-prime housing market for the US--one of the most vulnerable spots in a downturn. There is a huge amount of debt involved. The real estate owned by Dubai World uses a huge amount of energy to make an inhospitable location desirable. It is in a vulnerable location, not unlike the distant suburbs, favored by those buying homes with sub-prime mortgages in the US. In some ways, Dubai World is a "canary in a coal mine." One wonders how far Las Vegas is behind Dubai.

Commercial Credit

To some extent, what we see in Dubai World is part of the commercial credit crisis that is occurring in many parts of the world. Too many commercial buildings have been built in areas where they are not needed. Prices have dropped, and vacancy rates have risen. The buildings were built with debt, and now there is serious question now whether this debt can be repaid.

Multi-Layered Debt

Before the crisis hit, everyone seemed to believe that someone was responsible was guaranteeing Dubai World's debt. Dubai was guaranteeing Dubai World's debt, but who is guaranteeing Dubai's? If another organization (such as Abu Dubai) is guaranteeing Dubai's debt, are they also guaranteeing Dubai World's debt?

Around the world, we have all kinds of governmental entities responsible for huge amounts of sovereign and sub-sovereign debt. Much of the sub-sovereign debt is not doing well. We have this in the US, with the government guaranteeing the debt of all kinds of organizations, from nuclear electric power generation to housing lenders to the FDIC to the pension guarantee fund.

There are also states and cities with huge amounts of debt, supposedly guaranteed by insurance companies--but certainly those insurance companies don't have enough assets to handle more than a tiny percentage of defaults. Many states and cities are having serious problems with tax collections. Federal bailout funds have been helping for a time, but they won't help indefinitely. How does all this work out?

Islamic Debt

Dubai World is not the only Middle Eastern organization with debt restructuring. Earlier this year we read:

Billed as safer than traditional banking due to requirements for assets to underpin deals, Islamic bond holders worry they may not have any more legal safeguards than conventional counterparts in case of default, or perhaps even less, partly due to the untested nature of the process.

So if this default isn't the first--it is really the third in a row of what was supposed to be a safer way of lending--the default raises questions about lending in general in the Middle-East. If countries in the Middle-East are using this type of financing for some of their new oil investment, this default is likely to mean that interest rates will be higher, and funds less available, if they want financing in the future.

Debt of Emerging Economies

Dubai is an emerging economy. Recently, investors have been less worried about defaults of these economies, based on costs for insuring against debt defaults. But now, the default of Dubai raises the issue of how secure the debts of these emerging market economies really are.

Some of these emerging economies are oil producing nations, so might be thought to be safer, but the Dubai situation begins to raise questions. Some oil producing countries that come to mind with potential debt problems include Mexico, Angola, Brazil, Kazakhstan, and Russia. If there is increased concern about the debt of these countries, loans are likely to be less available, and interest rates higher. This is also true for loans related to oil investment, even if the loan is to a company within the country, rather than the country itself.

Debt of Countries (or smaller organizations) that Have Excessive Debt

The Dubai situation brings to mind the fact that there are quite a number of countries--not necessarily emerging markets--with high levels of debt, that may not be able to pay back the debt either. Examples include Japan, Italy, Greece, Hungary, and the Ukraine. States like California come to mind as well.

If Dubai defaults (or even if it doesn't), what is the fallout potential?

Direct Fallout

The direct fallout potential of a debt default by Dubai seems to be relatively small. There are a number of European banks that may have to recognize losses on these bonds, but the amount of exposure is likely to be manageable at least according to BBC. Some banks have already had their equity shored up, in recognition that problems such as this are still "hiding" somewhere. For example, the Royal Bank of Scotland has had its equity shored up by the Treasury's Asset Protection Plan. But if the equity of some banks is reduced once they are forced to recognize losses on the bonds, these banks may cut back on future loans, to keep their ratios of loans to equity within acceptable bounds.

There are also some investments of Dubai World outside of Dubai. For example, Rembrandt tells me that Dubai World is one of the largest investors in the industrial region "tweede maasvlakte" in the Netherlands, and that Dubai World has a 30% share in the consortium for a new container terminal which should start operations in 2013 in Netherlands. A default by Dubai World could have an impact on investments such as these.

There might also be some derivatives relating to the default of Dubai (or Dubai World) that would need to be paid.

Indirect Fallout

The indirect impacts are the big concern. Some of these indirect impacts are likely to happen, even if Dubai is bailed out, because the Dubai incident points out that the world is still vulnerable to credit issues--contrary to the assuring statements that governments and major newspapers recently have made.

Higher Interest Rates and/or Stricter Underwriting Standards

Which borrowers might be subject to higher interest rates (or stricter underwriting standards)? Looking at the "Parallels to Dubai" list above, the Dubai problems suggest that debt problems may be much more widespread than is currently contemplated in the pricing of loans.

Sovereign (governmental) debt default has receded from concern recently, especially for emerging nations. If Dubai can have debt problems, when it is in the oil-rich part of the world, and a major financial hub, this raises questions on many types of sovereign debt, for countries not as well situated. And if sovereign debt can have problems, this raises also questions on sub-sovereign debt--all of the debt of organizations whose debt is guaranteed by governments, but is not governmental debt itself.

The problems with commercial real estate are also highlighted. In some places, it may be a very long time until occupancy rates get to acceptable levels, and values of buildings get back to historical levels.

Interest rates everywhere are likely to rise, according to the Vancouver based Citizen's Bank:

"Perhaps the financial effect of this specific problem will be contained locally and will not infect the greater global economy," it [Citizen's Bank] said.

"However, one effect of this event will be that the cost of money just got a lot more expensive for everyone. Credit guidelines will be tightened again by all banks, not just those who are affected by Dubai; this will make it more difficult for consumers and businesses to borrow at all, never mind the interest rate. It would not be an understatement to say that Dubai is driving everything in the market at the moment."

And of course, the cost for insuring against debt default is likely to rise, also, since there is greater perceived risk of default.

Pressure on Governments to Rein in their Debt

With interest rates rising, and with an example that sovereign debt default can occur, there is likely to be greater pressure on governments to stop the rapid rise in borrowing seen in the past year. Of course, if there are limitations on the additional debt by governments, it will also becomes more difficult for governments to bail out banks and other organizations that need assistance. This will increase the likelihood that major banks will fail and cannot be bailed out, as happened in Iceland.

Pressure on federal governments may also lead to pressure on more local governments. If federal governments cannot continue to borrow as much, it will be hard for them to bail out local governments.

Rising Gold

If debt looks risky, investors will look elsewhere. Gold especially is likely to be bid up. There isn't a lot of it, but many governments and investors will want to buy gold, to avoid what appear to be unsafe currencies.

Increased Volatility in Currency Exchange Rates

My guess is that initially, investors will flock to US Treasuries, and the dollar will be bid up in value. Then US Treasuries will not be perceived as safe, and investors will shift to other currencies, perhaps the Canadian dollar or the Euro. Eventually, I wonder whether there will need to be a change to the international currency system to reduce the volatility. This might involve less free exchange among currencies.

Unwind of the "Carry Trade"

A number of individuals have been writing about what appears to be an increasing "carry trade," with interest rates near zero in many countries. What happens with "carry trade" is investors borrow money in one currency, and invest it in bonds or stocks using another currency. There are many currencies which can be borrowed at low interest rates now, which might be suitable. The dollar, when it was falling, would be especially desirable, because the continuing decline relative to other currencies would give investors a second opportunity for gain.

If there are sudden changes in the relativities of the various currencies, it doing "carry trades" will suddenly become much more risky, and hence less desirable. This is especially the case the currency which has been borrowed begins to rise in value relative to other currencies, because then the cost to pay back the loan suddenly rises. For example, if the US dollar is being used for carry trade, and it starts rising instead of falling, this could lead to an unwind of these exposures.

Another push toward unwind of the carry trade may come from the perception that the investments being purchased with the borrowed funds, especially if they are in emerging markets, are more risky than originally assumed.

Lower Stock Market Prices

One can make a case that the rise in stock market prices around the world in the past few months has been financed by loans at close to zero interest rates, including carry trade debt. To the extent that interest rates rise (or debt becomes less available), this will tend to deflate such a bubble. Also, if the carry trade starts to unwind because of currency volatility and other issues, this will mean less money available for investment in stock markets, and will further reduce prices.

Besides the unwind of the bubble caused by debt at near 0% interest rates, there will also be the issue of lower profits by stock companies, because of lower sales (due to lack of availability of debt for would-be buyers to purchase the products sold by the companies).

Lower Commodity Prices

If debt rates are higher, and credit is less available, demand will drop further for discretionary items, such as new cars, furnishing for homes, and expensive food, including meat. With lower demand, prices will drop for commodities including oil, natural gas, uranium, and some types of food.

Lower Investment in Oil, Natural Gas, Uranium, and Farm Equipment

With (1) lower commodity prices, (2) more volatile prices because of changing exchange rates, and (3) higher interest rates, there is likely to be less investment in a large number of items, including oil, natural gas, uranium, and farm equipment. One reason for the lower investment will be lower profits (because of the lower prices), leaving less funds for reinvestment.

Layoffs, More Recession

With debt less available, individuals, businesses, and governments will be buying fewer goods and services of all types. The people working in sectors that would have been providing these goods and services will find themselves without jobs, or with reduced hours.

Timing

All of this will not necessarily happen at once. Initial analyses are likely to show that even in the case of a Dubai default, losses can easily handled by the system. It will only be as higher interest rates and tighter lending standards start working their way through the system that the impact will really start being felt. Within three months, I would expect impacts to start being felt fairly widely, if my view of the situation is right.

This is an interesting link found by someone in our ASPO-Sydney group:

"... when you go back last year... when the oil got up to $147 a barrel, it was used as a collateral to finance an incredible Ponzi scheme in the Middle East and now that this Ponzi scheme is collapsing ...but there are players waiting on the sidelines to move in and snap up bargains, but they are not going to do what you see happening in the US or UK. They are not going to waste their money, they are going to let the chips fall wherever they may. They are going to try pick up assets on the cheap. But it's the global game. We are entering the phase 2 of the global credit crisis. And it is also the beginning of a world war of currency speculators and currency wars. In other words the war today is not really fought on the ground with tanks and guns, it's fought in the currency pits. It's fought in the currency futures pits. We can see the Euro traders and the Canadian dollar players and Russia is buying Canadian dollars now, to diversify away from the US dollar...."

Years of increasing money supply (due to every relaxing credit requirements) have lead to a situation where, in some counties, people think simply holding land (land banking) can create wealth. Land should be a store of wealth only. People hold land as a capital gain play, not as an ongoing business or to add value through development.

In Australia this has lead to the situation where Invest funds (like Superannuation/Retirement funds) have pushed up agricultural land values to unjustifiable levels. It's now so expensive, that realistic returns from farming can't justify the prices being asked. Only people with assets from other businesses (Lawyers & Doctors) can get into farming. Someone with the passion & skills alone, can't get into farming & expect to survive the critical first ten years of establishment.

This Capital Gain focused investment diverts funds from other potently more valuable activity,

What you have described here is the acceleration of frenzied activity in the Ponzi scheme that superannuation is, just before it is exposed as fraud. For years we have been told to invest for the future, however there are only a limited number of productive investment opportunities to go around. The sheer weight of money chasing them is what has forced prices for assets up and yields way down, in some cases less than inflation. At the end of the day, regardless of the mechanism, the elderly need to be supported by the younger generations, working in productive enterprises. When fewer productive enterprises exist, or younger skilled workers find themselves to be demographically advantaged to demand much higher pay, the retirement incomes and expectations of many superannuation investors are going to run into the harsh reality that unearned income can evaporate pretty fast when too many investors are chasing too few returns.

Matt, the only pressure Sydney airport is under is an artificial limit on flight movements. I work under a flight path about a mile from the airport and no planes fly over me until 6 am due to the 11pm-6am curfew. The airport has been there for 80 or so years with increasing plane sizes and numbers through that time. the Nimbys who bought houses at a cheaper price because of flight paths should not complain about aircraft noise, if they don't like it they can move.

Of particular interest to me were TBill rates for January (60 day TBills) going negative in mid-October. Clearly someone with tens of billions of dollars felt that paying Uncle Sam to hold some of his money was safer than real estate, safer than stocks, safer than corporate bonds. Pretty clearly someone with some clout was betting that by mid-January we'll be seeing a leg down on the next step in the global depression.

Of course armchair enthusiasts can say whatever they want and make whatever argument they want. But right now I am watching what some of that big money is doing. Clearly someone with lots of cash has a very "doomer" attitude, at least for the short term.

NOTE: Last time TBill rates went negative was around the Lehman debacle.

Now that the sovereign default cat is out of the bag (Ecuador defaulted last year but nobody paid attention, they do it all the time), the question is how long will it take for the entirety of the problem to emerge?

Remember, the finance crisis was initialed by the bankruptcy of New Century Financial Corporation a day after April Fools' day in 2007. The Fed started cutting short- term rates August 17, then the Bank of England offered support for flailing Northern Rock about a month afterward. April, May June, July ... August; that is five months.

Let's allow three months for the current round of troubles to blossom. After two hard years, the money- community is better equipped and trained to ferret out insolvency truths from finance's Decepticons.

I think Dubai is just the tip of the iceberg. There is more toxic sovereign debt out there and enough of it will emerge to wreak havoc. The governments and central banks are using 'Key Man Strategy' to prevent key men - debt dominoes - from falling. Well, they missed one and the key man approach is now doubtful. What is next? China is a continuing problem, both from debt angle, in the matter of transparency, corruption and state influence and from a money flow/currency standpoint. Uber- bears Societe Generale suggests an end to China's trade surplus next year, which implies a catastrophic bust. In other words, money will not likely flow to China with the reason being another credit squeeze, as was the case last fall.

An Abu Dhabi bailout of Dubai is likely but unwise. Dubai is another finance black hole, but what is AD going to do? Good lending following bad is bad economics but good politics. Unfortunately, the first bail will be followed by many, many more. That underwater hotel gets more expensive every minute.

The upshot is this should end the 'Happy Talk' spewage proclaiming the end of the finance crisis. Rather, this is more evidence of the failure of money to substitute for oil.

You know, there are a lot of bad Dubai puns out there: 'Q and A'

Q: Did you hear the one about Sen James Imhofe going to Copenhagen for climate discussions?

A: It's a joke ...

moving right along ...

Q: How many stockbrokers to you need to change a lightbulb?

A: How many do you have?

(Postscript)

Some Dubai issues not discussed - not known - are the off the books and not- to- be- discussed funds at risk. Dubai was and is the money- laundry for the entire Middle East; weapons, drugs and money. Dubai was a smugglers' paradise before it became a modern- day smugglers' paradise (financial center). Since the laundry would operate around the construction of giant, ugly buildings, the lack of customers for same could put amounts far greater than $50b at risk.

This 'underground Dubai economy' may be one reason for the Abu Dhabi hands off approach.

Also, the second- tier speculators; flippers, buy-to-let and individual builders - not to mention contractors and suppliers - are also on the hook. There is a lot more to this than meets the eye ...

Thanks Steve! You make some good points, in your comment and in your blog piece.

If Dubai World is in trouble, clearly there are a lot of other developers in trouble, and a lot of manufacturers of everything from sofas to drywall to cement that will have less business than they otherwise have. And then there is all of the legitimate businesses plus the financial money laundering that is being done through Dubai. This whole mess is going to have an impact on these businesses as well.

Time will tell about your and my three month estimate. It could be we are both wrong.

Nov. 27 (Bloomberg) -- A financial crisis in Dubai will hurt remittances to India and reduce job opportunities for citizens of the south Asian nation, said Thomas Issac, finance minister of the southern state of Kerala.

About 4.5 million Indians live and work in the Gulf region and remit more than $10 billion annually, according to the Ministry of External Affairs annual report for the year ended March 31, 2009. Remittances from the Middle East account for about 25 percent of Kerala’s economy, Issac said.

Certainly, the same effect is felt in Mexico and Central America as a byproduct of the housing bust, here in the US.

Another issue is the maintenance on what is already built, that creditors will presumably take possession of. Nakheel already is asking for an additional $2 bn to allow completion of projects already started, presumably excluding the 'world' island project and the 3d palm- tree island which have proven unmarketable. Maintenance and shoddy construction are serious issues as most building in Dubai were constructed of poor materials and slave- like labor.

You are building an oasis in the desert. Let us repeat that. The desert. They run the UAE Desert Challenge race there. It is an adversary that never sleeps and is constantly fighting to reclaim for its accretive redish sands the human footprint in the region. Simply keeping the roads clear, much less maintaining infrastructure that approaches what western Europeans would consider a "resort" is a obscenely expensive endeavor.

Dubai was already chalking up records for the most power consumption per capita (on the order of 20,000 kWh per year) and the highest water consumption per capita (the desert, get it?) in 2007 and still hitting 15% annual gains in both figures with ease. We won't even comment on Dubai's 2005 distinction for the world's largest per capita carbon footprint. If you can imagine this, over the last ten Dubai contracted three separate consulting firms to study the feasibility of supplementing their power needs with solar technology. None resulted in a report that suggested even highly subsidized solar power would generate net energy returns on investment. (Given the local weather, this bodes poorly for solar power).

U.S. Levels of Entitlement Accounting Delusion

The Emirati caste enjoy nearly 100% subsidies for housing, higher education (up to the PhD level along with 100% coverage of foreign travel and living expenses to study abroad) and what amounts to lifetime employment guarantees. It is no accident that a large fraction of Emirati work in government jobs. Firing an Emirati is so difficult even United States Postal Workers and Teacher's Unions would be envious.

Something Approaching a Wholesale Overappreciation of Local Construction and Engineering Competence

Dubai depends almost entirely on an extremely base foreign worker class for construction. This has given Dubai the distinction of mounting the most expensive (even size and scope adjusted) projects in the world. Presented for your review, one of many such examples:

Thanks for this timely and detailed posting, Gail. This clarifies much about the situation. It will be interesting to see what gets printed and what does not get printed about all this starting Monday.

It was no coincidence Dubai World came out with a public statement right before Eid so that now they have a full week to wait before having to make another statement about "what's next".

I am waiting for Stoneleigh and Ilargi's post on Dubai at TAE to also get their take on it all.

As Jared Diamond points out in 'Collapse', often civilizations notoriously produce their most massive buildings and monuments just before they collapse.
There is characteristically a slow build up over centuries then a mad burst of irrational over-building towards the end. Perhaps Dubai is our epitaph?

My exact thoughts fingolin. I imagine anthropologists in the distant future trying to figure out why so much effort and expense was undertaken to build an underwater (due to sea level rise) image of a palm tree and world continents. They'll ask, "Why would they go to so much trouble to build something underwater that can only be seen from space? Were they trying to communicate with aliens?"

I imagine anthropologists in the distant future trying to figure out why so much effort and expense was undertaken to build an underwater (due to sea level rise) image of a palm tree and world continents.

Future scientists (assuming we are only talking about a few hundred to thousand years or so) will have a pretty good recod of sea level rise. They will be able to tell that they were initially above sea level. Much longer than that, and I suspect waves and currents will wash them away. But, it is a good imaginative thought, much more colorful than the more boring slow decay we should actually see.

often civilizations notoriously produce their most massive buildings and monuments just before they collapse.

It just so happens that next week is the grand opening of the joint venture between MGM Mirage and, you guessed it, Dubai World, and which also happens to be the largest private building venture in the western hemisphere -- City Center in Las Vegas. All eyes in Vegas are nervously watching to see how this monstrous casino/high-end mall/condo complex (which is also supposed to be built according to some standard of "greeness!") fares in its opening weeks.

And speaking of Vegas, there is a chilling video produced recently by Current TV in the Vanguard series called "Lost Vegas." [link to hulu]

I watched the first part of the Lost Vegas video, until it got the part about the eviction of the woman with her small children. All of this is going to affect many families. A person hopes they have relatives they can move in with, or somehow "make it" in a better part of the country.

I think we can all guess how well City Center is going to do. It is sort of like watching a slow motion movie that we already pretty much know the ending for.

As Jared Diamond points out in 'Collapse', often civilizations notoriously produce their most massive buildings and monuments just before they collapse.

I haven't read Diamond, but I can think of two ways which this would make sense. One, that when things start to decline, instead of changing their ways or tightening their belt and weathering the tough times, the leaders decide that the 'best' thing to do is to recapture their old glory, and often do so in exaggerated or myopically nostalgic ways - which doesn't work and causes the very collapse they were trying to prevent. Or two, the "slow buildup" has long-term financial advantages which are the only thing that makes the eventual "mad burst of irrational overbuilding" even possible in the first place, and once they go down that road things start turning into an unmanageable mess. (For example, in the case of an empire, the bigger it gets, the more resources they have to call upon, and they easier time they have expanding. Eventually they reach the point where a mad conquest-rampage is possible; but when it's over, the empire's spread too thin and falls apart. During that time, they might also use some of those resources to build extravagant monuments; after all, societies usually try to show off their wealth and power.) ...Also, #2 could happen and then be followed by #1, as they're not mutually exclusive.

When this all started in 2001, Cheney promised us it would cost "$50-$60" billion to fight this "war on terror". We're now rapidly approaching $1 trillion and new estimates show that cost per soldier basically was vastly understated in the past, now being as high as $1 million dollars per soldier.

The empire is dying and in dying is attempting to recapture its old glory, no matter what the costs to its citizens. And who is enriched out of all this? Why, the bankers and the military industrial complex.

Note: I recently read something that I'd previously missed but which makes good sense. Why is credit drying up for small businesses? Because lots of small loans are more dangerous to a bank than fewer large loans. The impact of the failure of large loans frightens politicians into bailing out the corrupt banks to prevent it from occurring but they'd never bail out hundreds of small loans to Ma and Pa Kettle on Main Street.

So the entire financial system is now warped beyond recognition - the "safe" plays are the massively indebted national governments (including our own) because they can use the power of violence to extract taxes to force repayment or even better, just interest payments in perpetuity. That's what the banks really want - eternal debt slaves, and your government, whether US, British, German, Dutch, Spanish, etc., are all eagerly cooperating to make you eternal debt slaves to these bloodsucking leeches.

And no, your vote does not mean jack squat. The TARP bailout last fall is full and complete proof of that.

This analysis seems to be be pretty close to what my own gut is telling me. The amount of the possible losses is on the order of what was lost in the Madoff scandal, so at first blush the system should be able to handle it.

The people who do potentially stand to lose from this are probably just now trying to figure out what their potential losses are, but they aren't about to come out and announce to the world - they are somehow hoping to keep it all together.

In the end though, the world financial system reminds me of a bridge that has all kinds of cracks and structural problems. Everyone is hoping the whole thing won't topple, but this sort of thing is like finding a new crack somewhere. Too many cracks and the whole thing falls in, but nobody is really sure how much more stress the system can take before we reach that point.

An investment analyst I know had an interesting comment about Madoff. He said, in effect, that Madoff was providing what the market wanted. He said that money mangers would rather have a lower steady return on investment, with less volatility, than a higher average rate of return, but with more volatility, however unlikely it is that Madoff’s returns were real.

In a similar fashion, I think that Michael C. Lynch, et al are providing what the market wants to hear--assurances that the worst case for oil supplies is a production plateau many decades from now, however unlikely that is.

Of course, the reality is that investment returns in the real world tend to be very volatile and we do have finite fossil fuel resources, but because the market prefers to believe in the infinite world model, IMO most debt and equity instruments are mispriced, since there is not nearly enough exported oil available to generate the economic activity necessary to pay back the debts that have been incurred or to generate the corporate earnings that world stock markets are expecting.

I think that a more realistic view of the oil markets is that the global post-2005 Cumulative Net Oil Export (CNOE) depletion rate is in the neighborhood of 5% to 7% per year, which suggests that global post-2005 CNOE would be about 50% depleted between 2015 and 2019.

Reality is first intruding on the discretionary side of the economy--whether it be Las Vegas, Orlando or Dubai--but I think that we are just in the early stages of the gradual realization that most debt and equity instruments are mispriced.

In the end though, the world financial system reminds me of a bridge that has all kinds of cracks and structural problems. Everyone is hoping the whole thing won't topple, but this sort of thing is like finding a new crack somewhere. Too many cracks and the whole thing falls in, but nobody is really sure how much more stress the system can take before we reach that point.

I like your analogy. The various governments have been busy wallpapering over the cracks, hoping folks won't notice them too much.

I like the bridge analogy, too. But what is most remarkable to me is how predictable it is that, given the flaws in structure and the forces directed upon it, it must fail. Can the fact that Dubai, the most unsustainable exercise in extravagance in the world, is now imploding truly be a surprise to anyone whose job it is to assess investment risk? (And, as a corollary, is it really a shock that the Las Vegas economy has crashed in the U.S.?)

Recently in the Bay Area, we had one of our great bridges, the Bay Bridge, closed for an extended period of time after a too-hasty repair failed. The repair failed because (and this was admitted) they didn't anticipate the repair would have to withstand *wind shear* and *auto vibrations*. These engineers seem to know less about their professed line of work than a three year old playing with Legos.

Our economy and physical infrastructure are held together with spitwads and duct tape put in place by people who have the education and intelligence to know better, people whom we, as a society, have in fact trusted to do the job because of their supposed expertise. And yet when it comes crashing down, it turns out to be a surprise to everyone involved. To me, being surprised by something easily predictable is a measure of incompetence. Since I can't imagine the Bay Bridge engineers wanted that repair to fail, I have to presume they were merely pathetic bunglers. But with the folks who have engineered the world's now teetering financial edifices, the lack of structural integrity appears to be due lack of scruples rather than incompetence, leading me to believe much of this is no surprise at all.

Gail thank you for this. It helps sort out the details that are almost impossible to gleen from the MSM.
No matter if this crisis is the beginning of the final downward spiral in world finances or not it is a very good example of how things will go when the sharpies in the investment community finally lose their nerve. It is a neat experimantal demonstration of what Ilargi at The Automatic Earth (and you detail a bit above) has been saying will happen when fear finally sets in.
We will see a rising US dollar for a term of a year to two years, collapsing prices for almost everything else from equities to commodities with food and other staples perhaps the only exception.
In the long run we can look for the US dollar to collapse but not in the short term.
It is almost as if this was arranged as a demonstration experiment in how the world economy really works.

I don't have the credentials to argue this and it may be that people see both gold and the US$ as safe havens in the short term. But if gold rises against the dollar it will rise even more steeply against other currencies and other economic components. The point I think the TAE is making is that in the short term the dollar will be seen as a safe haven. Once the reality of the US situation sinks in that will change too but somewhere down the road. No one is trying to make a precise prediction on timing. However my point is that this episode shows what happens in the short term when people get afraid. Note that gold went down vs the dollar.

Yeah, well gold dropped all the way back to last week's all-time high. As for the dollar still being seen as a safe haven, I doubt it is seen that way at all these days by those "in the know". They just haven't figured out how to get rid of their dollar assets without bringing down the whole house of cards. And there are few alternatives to those that want to bail. Getting out of the dollar is like playing a game of pickup sticks for our major creditors. You may be correct in the very short term but IMO folks will be scambling for the exits pretty soon.

When the Dubai default became news, gold dropped from the $1190s to the $1130s. At the same time the dollar surged from (FOREX dollar index) 74.2 to 75.5. This looks, to me, like the common "flight to safety" argument.

Yet that argument appears to have not held water very well as gold surged back to just under $1180 as I write this and the FOREX dollar index is back down to 74.8, having held 75.5 for a few brief hours.

It appears that confidence in the dollar is waning, yet every other currency is being aggressively devalued by its central bank as well.

As Mish is fond of saying, all fiat currencies constantly lose value, just at different rates.

China has 1.9% of their reserves in gold-they could effortlessly take the gold price sky high if they wanted. Their foreign reserves grow daily-even to hold the 1.9% ratio they need to buy a lot of gold.

It is hard for me to know how long the US dollar will rise. I expect the dollar to rise initially, but at some point all of the borrowing, and the need for more bailouts, is going to have an impact, and something else will take its place as the currency of choice. It is hard to know how this will work out--just volatility for a few years, or an actual change (break?) in the system.

Thanks once again for a well argued and clearly written assessment of the situation.

I agree with you that we are overdue for the next leg down in stocks, houses, etc. and that this will boost the dollar in the near term resulting in falling prices for nearly everything including oil and gold. The question is always one of timing -- when will the impact of all that borrowing take place.

Now, the question we must ask ourselves is an old one: is this the final, blow-out phase of the gold bull market that began 10 years ago? Or is it a trap…intended to catch the Johnny-come-latelies in the gold market? Of course, we don’t know any more than any other human being knows. But we’ve been watching Mr. Market for a long time. And we’ve come to the conclusion that he’s an SOB. Trouble is, you never know exactly what kind of an SOB he’s going to be.

I love the idea that, no matter what else we think we know and would like to prognosticate about the markets, the only thing we can be certain of is that "Mr. Market is an SOB." It is my opinion that this applies not only to the gold market but also to the oil and gas markets.

Your assessment that "It is hard to know how this will work out ..." is right on.

Any stories that claim Dubai is a sovereign default are misleading. Dubai is sort of like a state government in a federal system and does not issue its own currency. While Dubai World is close to government it is not as far as I can tell government guaranteed.

But anyway, the structure of the UAE is such that the other emirates (particularly Abu Dhabi) are unlikely to see any major insolvencies occur anywhere in the federation.

However, potentially the UAE could collapse (very unlikely) under the strain of its currency board. Overall, the debts that are owed by Dubai firms to outsiders (in foreign currencies) are huge and it is possible (but not probable) that the country’s currency could fail trying to bail these companies out.

"We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts," the official in the government of the emirate of Abu Dhabi told Reuters by phone...

...Constitutionally, each emirate in the UAE is a separate legal entity within the loose federation, and each controls its own natural and financial resources. The federal government has no guaranteed access to those resources nor is it obliged to underwrite the liabilities of any emirate.

Edit
I take this to mean that Abu Dhabi will save their own banks and investing elite from the debacle, but, foreign investors will be left to take their losses.

It's hard to say, but there is so much dirty money in Dubai, tied up in all these building projects. Bailing out one investor would create a clamor from the others. These might be in a position to do some harm to the UAE hierarchy.

UAE does not want to bail out the Sicilian or Corsican mafias, Colombian cocaine producers, Afghan/Taliban opium cartels, Myanmar government officials, Middle Eastern/Egyptian intelligence services, Eastern European weapons manufacturers/traffickers, prostitution rings, car smuggling rings, currency and gold bag men, persons associated with ex- Ugandan dictator Idi Amin or any of his people, or any Shiite private groups. This is a partial list. All have trouble- making capability and the Emirates ruling clique is quite aware of this.

It's interesting that the Federal Reserve has been handing out dollar swaps in large amounts like candy ... not here. One has to wonder if the CIA instructed the Fed to steer clear of the vulnerable Dubai 'key man'.

Gail, thanks for taking time from your holiday weekend to put this together. Not being a financial expert, I have a few questions:
1) How does this compare to Iceland?
2) Worldwide stock markets took a nosedive Friday. How do those losses compare? That is, are there comparable losses from people panic selling?
3) "Why did no one see it coming?" -- Queen Elizabeth II. I suppose some did, but were there warning signs?

1. In Iceland, it was large banks that failed. The banks were bigger than the rest of the Iceland economy, so it took down the whole country.

In Dubai, it is a state-owned firm that is failing--perhaps a bit akin to US's Fannie Mae or Freddie Mac. Dubai is part of a federation (the UAE), in some ways like a state in the United States, but in many ways looser. The assumption was that "senior partner" Abu Dubai (also part of the UAE) would step in and bail our Dubai, but it is not clear that it will.

2. I haven't put together on stock market falls. There was typically an initial drop, and then a rise again. Secondary effects, which are really more important than primary effects, will take longer to be felt. I am suggesting three months, but it could be longer or shorter.

3. There were warning signs, but everyone assumed that as long as what appear to be "close relatives" have money, they would take care of those without money. Most Westerners don't read Arabic, and don't exactly understand Middle Eastern political systems, so some of the more subtle nuances were likely lost on people in this part of the world.

A link I give in the post is a Reuters article that talks about the potential for default, back before the current incident. It says:

Debt restructurings at Saudi conglomerates Saad Group [SAADG.UL] and Algosaibi have put about $9.6 billion of investments at risk at 30 Gulf banks alone, and the fate of Dubai government-owned property firm Nakheel's $3.5 billion Islamic bonds, which mature in December, is being closely watched.

In Iceland, it was large banks that failed. The banks were bigger than the rest of the Iceland economy, so it took down the whole country.

I just came back two weeks ago from visiting some Icelandic friends who moved back to Reykjavik two years ago and experienced the entire Icelandik banking crisis. One of them even worked writing software for the Icelandic financial industry until it collapsed. They live about 5 blocks from the parliament and counted themselves among the regular pot-bangers that brought down the government.

The most amazing thing about visiting them was how normal everything was.

People still use debit and credit cards. They still drive big cars. The malls and stores are all still open. Life goes on pretty much as usual.

OK. They have two or three large construction projects that are on hold and people don't do their Christmas shopping in London and Copenhagen like they did in the crazy banking years. And yes, a few investors may have lost a lot of paper wealth. But the regular Icelanders view what happened as largely restricted to the Banking sector and somehow separate from the Icelandic nation.

The phrase "took down the whole nation" could mean just about anything and, at least in the case of Iceland it appears that things have simply returned to some sense of sanity and probity.

Lets hope that the end of BAU in other Western nations has the same results.

Iceland has a long tradition of hardship. I lived there back in the mid 1970's when the US had bases there. It seems from all my reading that the Icelander's solid foundation saved them from the failure of the banking scams. They still lost money, but no one is on the streets homeless.

You can't say the same thing about the US. We don't have 900 years of history holding us up.

Well we Icelanders have actually lived on this island for at least 1100 years and new research indicate we have lived here even longer (maybe 1300 years or since the year 670).

I live in Iceland and I can confirm that things are not so bad at least not yet. Iceland has not defaulted on its debt, only the big banks. GDP has contracted this year about 8% a little less than was expected. The unemployment rate is about 8%.

In some way this crisis has been good for us. People are not as much thinking about buying stuff. Icelanders were crazy in the years 2004-2007. Everyone had to have the biggest car and the biggest house. People are of course still buying stuff and travelling abroad but not as much as before.

New research in Iceland also shows that children in Iceland are feeling better since the crisis started. People think it is because people are spending more time together and parents are not working as many hours as before.

Diamond's "Collapse" has a great section concerning how Icelanders have survived for so long whereas Greenland has had a more difficult time. Icelanders have realized their limitations in their fragile environment and set severe limits on land use. All in all, despite what has gone on financially, they are quite conservative in terms of change and very self-sufficient (energy-wise).

Very glad to hear that Muninn. Though I spent a limited time in your country I came alway with the sense that your people still had a strong connection to the natural world. And given the rather harsh and unforgiving environment I would think that would foster a better grasp of the reality of human fragility. Perhaps they were enchanted with that sudden surge of consumerism but it doesn't sound as though it has lasting negative effects.

Thanks for the reply. Always glad to see a fishery improving. My wife's family and their ancestors have been catching Pacific salmon (mostly sockeye, but a nice smattering of kings and occasional good bunch of coho) likely for longer than than you Icelanders. Things have been a little erratic in our fisheries of late. Big commercial pressure on different areas of the Pacific, changing water temps and other factors' contributions to the situation are not currently well understood.

I being a rather average singlingual yank couldn't do much with the article you pulled the stats from. I'm guessing those are total fish numbers.

For comparison you can see how our Alaska catches have been faring here

good fishing to you, about all I know of your Island is what the National Geographic spread had on it a year or few back, the pics were beautiful. It had a lot of features that reminded us of places up here, but Alaska is not near as compact.

You are of course welcome to Iceland. It´s a beautiful island. I love to hike here. It can be expensive to catch some salmon though.

Rockman and Dragonfly41,

It may be true what you say. Although I say life is going on as normal for the most part I don´t want to paint too much of rosy picture of the situation. Taxes are higher to pay for the government budget deficit and some government services are being cut.

I also think most Icelanders know that things can change suddenly in this country for the worse. This island is in fact very geologically active. There are many volcanos here. There are volcanic eruptions on average every 5th year. Even though most eruptions are harmless there are some that can be deadly. You can read about "Skaftáreldar" eruptions (the 1783 eruptions) here:

I agree that the level of collapse will not be evenly distributed. I am hopeful that our in-city neighborhood in Seattle will be a fairly good place to be in the coming years.

And thanks for the compliment. I will have some time in the next few months to make a number of improvements to the Energy Export Databrowser and I also intend to build a databrowser for the minerals production/consumption data from the USGS. I really want to see what the timelines look like for US production/consumption of things like Copper, Nickel, Platinum, Phosphorous, etc..

I'm betting that the Pacific Northwest in general will survive much of the transition in relatively good shape. Here in Victoria, BC, there's a lot of awareness about resource depletion problems and being able to handle an energy collapse, and I suspect that if Vancouver Island was cut off from the mainland for an extended period, the disruption that this would cause would be fairly mild and brief.

I attribute this in part to the fact that the region still has very much a frontier mentality about it, is not so far removed from its pre-oil roots that this "technology" couldn't be revived fairly quickly, is still largely agrarian, and has an abundance of potential energy sources to choose from if it came to that. You can still find practicing blacksmiths here and enough horses in abundance to establish breeding farms, there's a thriving bicycle trade, and Victoria is still compact enough that on a bike you could go from one end to the other in a couple of hours without working out much of a sweat.

However, much of this argument applies equally well to Seattle and Vancouver, and to a certain extent to the southernmost part of Cascadia in Portland, OR. Admittedly, Vancouver's doing a good job of bankrupting itself with the Olympics, but my suspicion is that in the long run those debts will really not matter much in the broad scheme of things, especially if, as I suspect, you see the rise of local/regional scrip, something specifically not called money even if it spends the same, as the large banks collapse one after the other. Collateral for the scrip would be bonds based upon localized energy production, perhaps with a mix of secondary support structures (hard assets, gold, productive agricultural real estate and so forth. It wouldn't allow for a lot of speculation, but that's the whole point - get the currency out of the speculators hands, where it essentially ends up creating phantom non-productive wealth.

The Pacific Northwest might do well ... after 75% of everyone moves out or dies. Most of our food is imported, same as most everywhere else. Much of the best farmland in North America is buried under Vancouver subdivisions, and we bury more every year. The Island might be OK, although it's really not that farm from Seattle by small boat.

(1) Most obviously foreign banks holding the bag. But for how much? $80B of loans. But, if Dubai only misses six months worth of payments and is able to resume payments, that would only amount to a few billion of acvtual loses. I know that is the unlikely "white swan" best case. But headline numbers overstate things. But with many of the projects left unfinished a lot of malinvestment will have to be realized.

(2) All the expats who were doing the construction are out of work. Lots of labor from around the Indian ocean, plus lots of high end engineering and architectural firms who will now be looking for work.

(3) Loss of confidence in the Islamic banking system. This is its first test. Investors thought it was safe because everything was backed by physical collateral. Now legitimate doubts have been raised.

gail thanks for digging out these details, & putting this post together.

as a non-financial person, at least until recently, i am grateful to those who can decipher this arena describing the 'cracks'[yes very nice analogy ericy].

what seems obvious to me is that financial systems will eventually fail like a bridge would, at least part of it will just fall ; & i want me & those that are close to me- well actually everybody- out of harm's way.

What the crisis in Dubai illustrates, and why it's important, is that the financial ciris that's mired the world's economy is far from over, on the contrary. The massive 'sleight of hand' employed by the leading western governments, led by the US and the UK, simply isn't working. The vast sums transfered from ordinary, hard-working, families, into the pockets of the financial aristocracy - Wall Street - surely the biggest upward transfer of wealth in history, has only provide a fragile and temporary respite, not a solution or reform of the corrupt and insane system we live, and increastingly, suffer under.

Basically, the finacial system in the UK and the USA, have hijacked the government and are raping it to safeguard their own narrow, interests. That is, protecting their obscene lifestyles of luxury and plenty, at the expense of everyone else.

Dubai is a prime example of this perversion. A corrupt and decadent, mini-state, whích squanders its wealth, and the wealth of others, creating a fantasy, Disney World, for the super-rich, built on the backs of sweating slaves.

A system such as ours, so morally corrupt,doesn't diserve to survive. It's really Babylon.

Capitalism, as we know it, is collapsing. It's collapsing because it's a system that is simply well past it's sell by date, and it's really irrelevant to the challenges we face and the needs we have as a society. We cannot continue to allow a system which so grossly and grostesquely favours the interests of a tiny minority, at fundamental odds with the interests and aspirations of the vast majority of humanity, to continue any longer. Fortunately, it seems that 'capitalism' will destroy itself on its own, as it buckles and breaks, under its own massive and oppressive weight.

Yes, but actually having the government work on behalf of big money is termed fascism, not capitalism. Theoretically one could accumulate great wealth in a capitalist system without the benefit of government corruption.

Yes, but actually having the government work on behalf of big money is termed fascism, not capitalism.
Capitalism has never functioned without a strong central state to enforce its rules, often violently, from its emergence in the Italian City States of the 15th Century, to its peak under US Capitalism under Bush and now Obama.
These are the same groups of elite's moving seamlessly between both roles.

Any working state, by definition, must be able to internally enforce its laws (protecting person and property) & externally defend is territory (and thus its people).

The army (and police) are the core business of any government deserving the name. Been that way since the first Warlord learnt to rub two solders together, two minutes after the first farmers grow enough food to be worth fighting over/defending.

Capitalism (and Communism) are ultimately about arranging the economy to provide the fund needed to defend the said nation.

I don't think the kind of economic system we live under is really 'capitalism' at all, never has been, and never will be again. One should deferentiate between the ideology and dogma surrounding the system, and how it actually functions in practice. In theory, there are many things that are 'possible', yet have precious little to do with how reality functions, like the myth that we have a 'free market' system, that prices reflect value, that the system is 'rational', and that state intervention in the economy is low in the United States.

I think one can argue that the United States' economy isn't really 'free' at all, and hasn't been for decades, and is increasingly 'unfree', especially now when virtually the entire financial sector has been saved, bailed-out, given a massive hand-out, and is on permanent welfare. Obviously a 'capitalism' which cannot stand without collosal state help, and is too big to be allowed to fall, no matter how much they screw up, isn't really 'capitalism' at all, not that it ever really was. That was all, mostly, pure dogma, obsfucation for the poor sods who believed in the mythology of the system despite what they could see with their own eyes.

The only thing that matters is who has the power in society and how do they use it. Cleary the powerful have always used their power to look after their own interests first, and as they are a tiny minority, livng lives vastly different from the huge majority of the population, their interests clash and are in direct opposition to most peoples.

Capitalism has been blatantly replaced by a form of corporate state, where the state and business have merged into one, with the military at the heart of everything. Some might call it a form of totalitarian democracy, or even an evolving form of fascism.

As usual governments are making things worse and making sure that everyone takes a hit when the edifice finally crumples. We seem to be in something akin to the phoney war before WW2, except this is the phoney collapse before the real thing commences. I just wish the collapse would get going and remove the governments from the loop before they do too much damage.

At least in an uncontrolled collapse people would receive the correct signals and therefore react correctly to the threat. At the moment we are in the situation where millions/billions of people believe they're going to have employment, that they can maintain their current lifestyles, that they will receive pensions and health care, that they will be able to afford to eat or have a roof over their heads. When in reality they shouldn't believe these things as they're untrue. What they should be doing is preparing best they can for a very different future rather than carrying on with BAU. During a true collapse they will at least be able to understand the situation in a way they cannot misinterpret and react accordingly.

They're not going to be able to keep that fancy island thing going, I grew up in Hawaii and know a little about this. Hawaii is only 20 degrees north of the Equator, so tidal forces are rather minimal, still, sand tends to be where it wants to be and not be where it does not want to be, and if it's not naturally there, you're going to have trouble keeping it there.

A case in point is Waikiki Beach. Now, Waikiki was originally a swamp! The name, Wai, for water, and Kiki for fresh, was because this swamp had outflows of fresh water from the Manoa valley. The Ala Wai canal, and tons of people and golf courses etc., have been keeping the fresh water channeled and sucked up, and for tourism purposes, nice clean sand put on the beach. I believe this started in the 1920s during the first tourist boom, but maybe later. When I was working one of my first jobs, at the "Blue And White Shop", a hotdog stand at the base of one of the hotels, I had to walk a LONG away across the hot sand to eat my lunch hot dog by the water. When I was last there in 2003, the water was about 25 yards from Kalakaua Avenue, since there's been some debate over the sand shipments in and artificiality, and Waikiki resembles a typical Leeward Side beach now.

Without tremendous energy inputs, those little islands and sandbars will be gone in an amazingly short time.

Go on my web site http://www.crudeoilpeak.com/ and use the external links on sea level rises expected by 2100. It's up to 1.4 - 2 m. Could be higher still, who knows how global warming will evolve in a non-linear way.

The real drama in Dubai (and elsehwere in the Middle East) is that oil money was and still is not used to build up a sustainable, renewable energy system which can replace oil.

News has overtaken the speculations inhere. Quote from MSNBC: Dubai ruler Sheik Mohammed has stressed the close bonds between the two most powerful emirates in the UAE, Dubai and Abu Dhabi, which celebrates its national day on Wednesday and offers a perfect forum to display unity.

An editorial in The National newspaper - which is bankrolled by Abu Dhabi and closely reflects the opinions of its rulers — said Dubai's infrastructure is sound and pointed out General Motors' revival after receiving a U.S.-backed bailout in comments that suggested an unchecked Dubai meltdown could harm the entire country.

The German newspaper Die Zeit reported that Abu Dhabi will lend money to Dubai but in tranches ($3.5 Billions now to pay creditors on 14 December) and with stiff conditions. On Friday, the European stock markets recovered since most of the Dubai debt is held by Arab banks and thus widening of the crisis is said to be contained.

You can be sure that Dhubai World explored the "Abu Dhabi to the rescue" option before the public announcement of a debt standstill. The fact that it is now on the table implies some armtwisting behind the scenes.

LONDON — In the last few years, big banks have found many surprising ways to lose billions of dollars by making loans that turned sour. But few can match the odd tale involving Kazakhstan and a little-known bank that many Western financiers wish had remained so to them.

From 2003 to 2008, the likes of Credit Suisse, Morgan Stanley, Royal Bank of Scotland, ING and others funneled more than $10 billion in loans into Kazakhstan’s largest bank, Bank Turalem, as the large Central Asian country enjoyed a growth boom spurred by its rich deposits of oil and natural gas.

So many of these loans are now bust that many foreign banks are facing write-offs of as much as 80 percent of their value,

Tides in the Persian Gulf are not so violent as elsewhere in the open Atlantic or Pacific. So, the man-made Dubai islands may be stable for quite some time if it where not for the rise of waters due to the melting of Greenland ice, and glaciers everywhere, etc. Oceans will rise about 0.4m due to the warming (expansion) of the water and the melting of ice will add another 5-7m in this century. The island will be under water for sure. This should have been considered when starting these islands 9 years ago but apparently it was not. The “celebrities” buying these islands (up to $50 Million each) will lose them but what are $50 Million for Wall Street bankers.

Although I think the amount of straightforward debt we're talking about here isn't absurdly high, does anyone have any idea what the value of the Dubai CDS market might be and what the impact might be on the CDS markets? It seems to me that unwinding Dubai's debt is probably going to be the least of our worries if there have been hundreds of billions in CDS traded on Dubai World or Dubai sovereign debt.

While there are many good general comments above about the post PO world and the ongoing collapse of a smooth functioning US economy, this ‘event’ is by no means the ‘big one’. In fact on a Richter scale of 21st century financial disturbances, in retrospect, this will seem like a minor tremor.

Anyone who has been even casually following the situation concerning Dubai would already know that Abu Dhabi had already given them financial assistance recently, and there were reports that various contractors were not getting paid. In addition, while the US stock market was open on Wednesday, there were already rumors about the debt standstill. Odds are that Abu Dhabi will give them some type of further financial assistance, although it will not be a US type 100% bail out.

News coverage seems to overlooked the fact that at least two, and possibly more nations intervened to support their currencies Thursday and Friday after the dollar hit new yearly lows Wednesday. That does not indicate a flight to the dollar but indicates a strong desire get out of the dollar that can only be slowed down by central banks.

The whole issue of the dollar carry trade is greatly exaggerated, and while it is occurring, there are not any strong indications that reversing that trade now would create anything more than a minor burp in the foreign exchange markets.

Apparently many news commentators, and often the often quoted Mish and Denniger, just don’t grasp how fast the Fed is putting out new money. And let’s not confine our focus on money multipliers and money supply indicators (which anyway show rapid money supply growth) – the money the Fed is printing up does go into the economy. Whether it produces an additional money multiplier effect on the money supply, while an important issue, does not take away from the fact that over $1 trillion in fiat money has already been created by the Fed, and that money has entered the economy. Granted most of that money ends up as excess bank reserves, forcing banks to buy Treasury bills paying no interest until something better comes up.

First I would like to say that memmel’s and oldfarmermac’s posts further below offer an excellent explanation of poor man’s deflation and rich man’s inflation.

As to my point – that the new Fed fiat money has already entered the economy – let me give an example.

The Fed bought about $300 billion in Treasuries for fiat money so far in 2009. Let’s break this down and, for example, follow a person selling $300,000 in Treasuries, who sold them through a primary dealer (usually a large bank) that the Fed directly deals with. Further we will assume that the money from the seller is deposited in his/her favorite bank (or banks to get around FDIC deposit limitations).

The person doesn’t use most of the money right away. However at this point the US money supply has now increased by $300,000. In addition, the bank getting the deposit doesn’t want to lend in out – resulting in the money becoming free or excess reserves. The extra money is then deposited back at the Fed to earn interest.

In, sum over the past year then, the Fed has added about $1 trillion in new fiat money, and because of tight bank lending standards, free bank reserves also have increased about $1 trillion. However the money supply may not have increased by $1 trillion since all of the Treasuries bought may not have been returned to the banks as deposits.

My point being is that even without bank lending the Fed’s policies increase the money supply. No bank loans or money multiplier effect is needed to get that result.

Granted credit is also being wiped out but the Fed and some new lending is staying ahead of deflation by constantly expanding total credit.

On November 26th, I asked these questions as I admitted to knowing very little about the Dubai crisis:

a. How exposed are other Persian Gulf nations to the Dubai crisis? We must assume that with the flood of oil money into the Gulf during the recent huge oil price run-up (before subsequent crash), some of it ended up in Dubai.

b. How exposed are India, Chinese or Singapore investors or hedge funds?

c. How exposed are U.S. and European zone big banks? Did some of the "bailout" money get sucked down this hole?

d. It is said that Abu Dabi (correct the spelling if needed) may step in and bail Dubai out...how much money does Abu Dabi have...from where?

e. How reliant is the Persian Gulf on holding oil prices at least as high as they are now to sustain financial stability? This would go to an issue of great interest to TOD posters and readers, by the way: If oil is getting more and more expensive to find and produce in KSA, Iraq, Kuwait and other Gulf nations, can we assume that profit margins for the Gulf oil producers are dropping? This would mean that what was once a high price for oil is now only a break even point (I have long said that $90 to $100 per barrel is probably a rational price for oil...a price the consumer can bear, but high enough to insure continued E&P development)

f. A more "conjectural" question: With nerves already on edge, could Dubai set off another round of "money hoarding" and thus stall the OECD nations in their recovery attempts? These are the questions a good investment analyst should be asking, should have been asking for the last two years or more.

Thank you Gail for some numbers to work with.

The above references to the last "building boom" in a declining/collapsing culture: In the U.S. it is sports stadiums. The building frenzy in sports stadiums is almost surreal...they will go down as America's cathedrals. Think of the steel, copper, glass, concrete used in even a modestly decent sports arena...oh, but we cannot possibly come up with the material to build a concentrating solar plant or large wind farms...idiocy.

No matter how badly decaying its slums are, every US city above a certain size simply HAS to have a showcase sports stadium: no ifs, ands, or buts. And to do this it gives away all sorts of overly generous incentives to the sports 'industry'. I think the arguments about boosting the local economy are largely bogus: it's all about vanity and prestige.

This distorted priority is also actively at work in academia. US colleges have (until very recently) been spending money like drunken sailors on all manner of campus improvements. And one of the high-ticket improvement that never seems to get rejected is the construction of elaborate sports complexes. Again, it's all about prestige, and has absolutely nothing to do with academics.

And finally, the most extreme case of this pathology is the Olympics, where cities bend over backwards to secure the venue for future Olympic games, and then spend obscene amounts of money and effort building Olympic facilities for what amount to as little more than a one-time use, after which then sit idly or are eventually dismantled.

In all of the above, money never seems to be an object and mysteriously makes itself available, as if by magic. It is all very discouraging and does not bode well for our ability to address the real problems.

In Arles, Provence, we toured the old Roman Arena and learned about the Roman culture in the first few centuries. The events in the Arena appear to be central to keeping the citizens preoccupied and ignorant of the things that would be their undoing. In the later stages, the Arena events were extemely sexual in nature to keep the audiences interested. Too bad real history is ignored today.

After 9/11, office space in tall buildings became far less desirable because they were perceived as targets.

It's a good thing for sports that Atta & Co. aimed for the military and commercial symbols rather than pure body count. Hitting a packed stadium, let alone 3 or 4 of them, would not only have had tens of times the number killed but would have eliminated construction of new sports venues.

As if Airbus and Boeing didn’t have enough to worry about already, the looming debt crisis in Dubai has cast a shadow over a backlog of aircraft orders, worth more than $60 billion, from Dubai, Inc.

The biggest – but by no means the only – example is Emirates, Dubai’s government-controlled carrier. It has more than $30 billion worth of planes on order from Airbus, including 53 of the double-decker A380, for which Emirates is by far the largest customer. Emirates also has placed 70 orders for Airbus’s forthcoming A350 widebody. And Airbus has outstanding orders from state-controlled leasing outfit DAE Capital totaling about $12.6 billion...

...Boeing is considerably less-exposed than Airbus to potential turmoil in Dubai, but it still has plenty at stake. Emirates has about $4 billion worth of Boeing 777s on order, while DAE Capital and low-cost carrier Flydubai have a combined $16 billion on order from Boeing.

I do not think that Airbus A380 is a valuable aeroplane. It is a marvellous aeroplane, but it is arriving at the wrong time. They should have built it 20 years ago—and it would have been marvellous—when we were in the ascending curve of petroleum, not in the descending one, and not now that we have entered T1. I told them five years ago but naturally they did not want to listen at all, so they carried on. Now they have the problems and they are paying the penalties to all these companies already. It is still not commercial. I do not know why it will be commercial. I do not see a very bright future for that.

During the November 21, 2009 Financial Sense News Hour broadcast
(ref. http://www.netcastdaily.com/broadcast/fsn2009-1121-3a.mp3), Matt Simmons was really ecstatic about Wind Power producing ammonia which could be used as a transportation fuel. I understand that the US Air Force considered using it in case of supply disruptions.

One down side is the reduced range. Ammonia has about half the energy density as gasoline. Ammonia powered vehicles have about 2/3rds the range of gasoline powered vehicle. I assume that the Airbus and the Boeing fleet could switch over to Ammonia. BAU as long as you don't expect the same range.

Does anyone know of the other potential down sides to using ammonia as a transportation fuel?

The downside of ammonia as vehicle fuel is that a source of hydrogen is required. Usually this is natural gas but syngas is also used (syngas is produced by passing high temperature steam over coal, coke, or other carbon source). Electrolysis as a means of hydrogen production is too energy intensive to be considered.

No production capacity exists to produce more than a fraction of the ammonia needed for transportation fuel. Based on historical infrastructure transitions it will take four to five decades to have a significant change over to ammonia. The only reason to even consider ammonia is the sunk cost in the existing world wide vehicle fleet, which will out last affordable gasoline and diesel.

you don't think toxicity/pressure containment issues with ammonia make it a rather far fetched solution? four to five decades is a few lifetimes of our vehicle fleet and probably a couple lifetimes of the fixed location diesel infrastructure. not too much vision in that vision.

No 9,000 mile non-stop flights (777-200LR), but shorter range, sure. New plastic planes (787++) with larger fuel tanks & new engines for flights cross-country and from New York to at least Shannon, Ireland are quite possible with ammonia or methanol (my preferred alternative).

Air freight would be a rare or unused option, and far fewer people would fly.

Just how much jet fuel is consumed a year right now? Its not like there won't be any oil, even in the U.S. Jet fuel is the only finished oil product for which we tap into TAPS and then export up here. A constricted air industry may well be able to get its fuel from oil for a long time, unless of course methanol will be a whole lot cheaper all costs considered.

But that's not the problem for air transport. The problem is that it is going to be competing against all the other uses out there for a shrinking supply of fuel. The price isn't going to be what the oil costs to produce, it's going to be what it costs to destroy demand. A lot of the demand being destroyed is going to be in the airline industry.

FWIW, until ammonia stops being produced from natural gas, if there is any conversion of airliners to an alternate fuel it will make more sense to make it methane than ammonia. The toxicity of methane is also much less than ammonia.

It would be safer with better returns to invest within India/China.
These are two of the least survivable placed on Earth.
Not a chance of not going over the cliff.
The sky was green the last time my brother was in China.

The intrinsic driver of commodity prices is population not financial moves outside of a massive currency deflation. I.e only after the large overhang of unpayable debt is removed and fiat currencies where changed to act as a store of wealth would commodity prices be influenced by monetary moves. Even then lets say you have a gold backed currency core commodity prices would rise and fall with the money supply.

This can easily be seen by looking at wheat prices over the last 50 years or so they have been in general driven down with little support from monetary inflation as supply exceeded demand for as long as most of us have been alive.

Both the demand side i.e population and the supply side are huge industries across all commodities and the supply demand curve in my opinion overwhelms our fiat monetary system simply because so much of our money is really longer term debt in non-critical construction both private and commercial.

Now thats not to say their is no tie but the tightest tie between energy and our economy is with coal and natural gas. Indeed both have moved down in price as industrial demand has fallen.

For oil the biggest tie is the shipment of bulk construction materials tied to the massive building boom from iron to concrete to wood. A lot of this is shipped via efficient rail and ship with a relatively small but significant effect on truck shipping.

Thats a one shot reduction in oil usage once construction slows appreciably further savings become marginal.

You can look at US numbers trucking fell about 12% and has started to level off the same with VMT its now about flat lined.

In my opinion appreciable reductions in oil usage will only happen from here on out via absolute economic collapse not conservation.

For example the argument that people will stop buying new cars does not make a lot of sense in advanced economies as the total number of cars on the road depends on the scrapping rate not the new car purchase rate which effects the age of the fleet and to some extent overall fuel economy. As the economy sours two things happen new cars are not purchased and since many people have multiple cars some seldom used extra cars are sold and actually driven.

I'd argue that this steady increase in the age of cars is closely related to illegal immigration into the US as older cars are bought by poor immigrants and kept on the road.

So for oil at least in my opinion there are actually only two events that can appreciably effect demand over and above the tight link with population growth.

1.) A rapid slow down in construction reducing the amount of construction materials shipped.

2.) A financial crises effectively stopping normal trade as letters of credit and short term debt becomes problematic to acquire.

Note that the second one is not entirely a drop in demand but a good part of it is pushing demand later once new payment arrangements are made. It has the effect of temporarily stalling a lot of real demand that is eventually met. As a simply example stores reduced their inventories but eventually they did restock certainly at lower rates but still at a significantly higher rate then in the midst of the financial crisis. Rapid financial collapses tend to work like the entire world taking a couple of days off but with the post vacation effect of having to work a bit harder later.

For just in time commodity delivery systems such as oil and even all commodities that are shipped globally this has the effect of causing a surplus as shipments lose their buyers for financial reasons and the economy effectively stalls for a few days.

A way to look at it is effectively for two days the world fasted and did not use a single commodity giving us a short term surplus most of it simply because purchase arrangements failed. This is not just oil but every single commodity with long supply chains.

Now even a repeat of this is questionable as one has to imagine now that the first crisis has past the commodity sellers and buyers won't be shocked if the financial system teeters again and probably have worked through more direct credit lines. Thats not to say the are immune but almost certainly more resilient than they were.

On the financial side however its questionable if another abrupt collapse is survivable however even here the worlds governments and central banks now will be more aggressive at preventing another collapse.

Thus in my opinion the two factors which would have a big effect on oil consumption are now in the past obviously we can not slow construction again thus its a one shot deal. A fast financial collapse is also effectively one shot as the financial system itself can't absorb another global collapse.

Thus we are now down to the game of population based oil demand and regional financial collapse to offset rising oil prices and collapsing real estate prices.

For large countries such as the US for example this would mean collapse of California or Florida as the tax base evaporates but you also have eastern Europe and all kinds of non oil exporting second and third world countries on the very of collapse. The important part is that in general these dominoes will fall sequentially not as a global panic.

Its now time for the big squeeze as our financial house of cards steadily unwinds yet population continues to grow putting strain on resources.

At the financial, economic, and government level its a race to see who the last man standing will be as economies collapse and regions fall into chaos they obviously have trouble importing commodities leaving more for the rest.

I like to call this the game of Jevon's Paradox mixed with Russian Roulette.
Thats what we are now playing.

While unfortunately I don't have any numbers in front of me at the moment, I tend to think that you might be overestimating the importance of oil consumption directly related to industrial activities and general construction.

Unless I've been laboring under a misconception, I have always thought that the amount of oil consumption directly related to personal automotive transportation, i.e., people driving cars, dwarfs the amount of oil consumption related to industrial and construction activities. And if that is indeed true, then even a relatively small drop in vehicle miles traveled as the result of such things as unemployment and people not engaging in as much shopping and recreation would have a much larger effect than a drop-off in industrial and construction activities.

In the US at least, (with the important exception of the petrochemical industry) relatively little oil is used directly in industrial processes. Most process heat is now supplied by natural gas, with coal in second place. Industry is also a very heavy electricity user, and by far most of that translates into coal and natural gas consumption, rather than oil consumption.

So, I guess that my take on the matter is that it is the amount that people do or do not drive their cars that is the primary determinant of US oil consumption. Again, I am willing to be proved wrong, but that's the way I think things are currently structured.

So, I guess that my take on the matter is that it is the amount that people do or do not drive their cars that is the primary determinant of US oil consumption. Again, I am willing to be proved wrong, but that's the way I think things are currently structured.

First yes I was talking about economic changes and their effect on oil consumption.
By far the largest use of oil is to transport people and food. Neither of these is going away.

Now to your last statement your making a lot of assumptions on our ability to change gasoline consumption i.e that trip to the mall is important its not.

One need only look at per capita oil consumption vs per capita income to realize that most of the oil consumption and gasoline usage in the us is related to the infrastructure.

For example show me where Michigan or even Detroits per capita oil consumption has dropped dramatically and I'll agree I'm wrong.

I will say this this assumption is a Internet myth anyone who actually looks at income and gasoline consumption will find that they are not related.

I've done the research and posted my findings many times with links etc.
If someone wants to do a post on this fine but even a trivial review of median incomes and per capita oil consumption and unemployment rates shows this assumption is false.

Of course the reason its so persistent is the assumption that oil consumption dropped dramatically in the 1980's following high prices.

Thanks for your observations. When we are in uncharted territory, it is hard to know how things will play out. At this point, we are still in the "world financial system is holding together". As long as that holds together, we are in reasonably good shape--I hope.

It seems like there still could be cutsbacks in discretionary spending, and more people laid off from work. This would mean fewer businesses open and people staying home more. It seems like it would result in less fuel use and less mineral use.

New building could be cut back from where it is today. There are still new homes being built. The University new me is putting up buildings--found it could be contractors more cheaply. But there are big cutbacks in funding now, and this will eventually enter the system.

Back when inflation /deflation was such a hot topic a while back I stuck to my guns on inflation.

To me it seems as simple as peak oil.Deflation can rule for a while yet.But it won't settle the bills outstanding.

We might be able (probably not) to pay our debts by going the austerity route.Given the realities of our nonnegotiable life style, that cannot happen, as it would be a painful proactive voluntary policy and therefore politically unthinkable.

We could default.We might yet-but that involves an immediate truly hard crash and no politician will go that route if it can possibly be avoided.

That leaves inflation-possibly just as bad or worse, except for one thing-it will be RELATIVELY gradual or mild in the early stages.It is even possible that it can be controlled and that we can screw our overseas creditors and our local savers silmantaneously.At least an inflation will buy a little time-possibly a few months , possibly a year or two.A lot could happen both good and bad under a federal govt operating under emergency laws during that time.

Meanwhile may be the banksters buy up all the hard assets for a few cents on the dollar because nobody else can get a buyers loan.Later they sell ten or twenty percent for substantially more than they paid for one hundred percent, repay Uncle Sam with his own nearly worthless greenbacks, and keep the balance.

Maybe we pull out of it chastened but alive and do what the British did after WWII- vote in a new govt.Maybe we go all the way down in flames like a shot up old WWII era plane that almost made the runway.

Inflation in a sense except that there is not support for rising wages and no support for expanded consumer credit. Thus the velocity of money will be low. This means of course that the printing presses will cause constipation in the world of high finance and thats the best way to look at it a huge turd that can't be expelled.

This means the money is only available for high finance or speculation by Wall Street it won't make it to Main street. You probably have read about the dollar carry trade similar to the Yen carry trade.

Thats why I call it rich mans inflation and poor mans deflation. A lot of this will of course simply vanish as its applied to defaulted debt but not all of it. Eventually as assets that can only be bought by the wealthy begin to be perceived as under valued it will fuel a buying spree for "cheap" commercial real estate and companies and even banks.

For all intents and purposes its simply consolidation of the ownership of companies and commercial real estate creating ever larger TBTF's.

On topic we probably will see a similar feast at some point in Dubai as its real estate is bought up for dimes on the dollar. However eventually it won't even be worth pennies aka the Pontiac Silverdome has no value as its maintenance costs are greater than the revenue flow from the property. I suspect Dubai will end the same way along with most of the world.

But at some point before the final crackup the bankster pilot will be thrown out of the cockpit by the congressional co pilot perhaps after the rise of a new third party or perhaps just as the result of simple desperation and a realization in congress that ANY new policy can be no worse.

Everybody seems to assume that the current federal reserve system will last forever.Tell it to the Romanovs and to the victims of the French gulliotines.

So far as I can see there is nothing to stop congress and the president from doing just about anything they please insofar as banking and currency is concerned except loyalty to thier current corporate masters.

Let us get into a situation that is only a third as tough as the ones many other countries have historically found themselves in and we will have a few hundred new faces in Washington pdq.

Money is an imaginary substance that achieves it's existence thru faith and agreement among men.

When the Peoples Worker Party of the United States cuts a deal with the President and the three or four largest splinter parties to nationalize the banks and the medical industry and issue new currency and write a new tax code where under everybody gets a guaranteed minimum income, things will go to hxxx in a hurry-but not nearl as big a hurry as if the economy is allowed to sieze up and drop dead like an engine run dry of oil and water never to run again.

Of course we might skinny thru by some OTHER means or another.But we ain't gonna pay the bills, we ain't gonna suffer a drop dead collapse due to a lack of consumers having some money as opposed to the banks having it all without a rock knife and gun political fight,and we ain't gonna settle for serfdom in this country.If we go down, the big boys will go down with us.

I like to think that we will make it, and that the public just sort of assumes ownership of all those electrons by means of a new interpretation of eminent domain law or something of that nature.

I don't think the populists and the socialists will have any trouble convincing all the people whose assets aren't siezed or liquidated that the fat cats got what they deserved if things work out that way.

All I am SURE of is that the bau system is unstable, getting more unstable by the minute, that countless undesirable positive feedback loops are coming into play, and that there must be and will be a major upheaval of some sort after which things may be fairly stable again for a while.

If we are lucky not too many of us (here in the US) will die during or shortly thereafter at the hands of marauding gangs or from riots,thirst, starvation,and epidemic disease -or as casualties of WWIII.

Because of recommendations on TOD, I read the "Web of Debt" book that asserted the Fed Reserve was unnecessary (if not evil) and could easily be replaced with a government run central bank. The further assertion was that this government bank could provide credit for any and all worthy projects and therefore nearly eliminate unemployment.

I've asked before if other TOD commentors find the the thesis of this book to be valid?

The further assertion was that this government bank could provide credit for any and all worthy projects and therefore nearly eliminate unemployment.

No government can print oil, or iron ore, or forests, or even fresh water. Government can pay people to dig holes and fill them in again, but if there is no rain there will be no food to feed them, let alone steel to make their shovels.

Your comment is obviously correct, but it does not seem relevant to the thesis of the book (which I portrayed poorly). I believe the author was contending that the current Federal Reserve is actually not a Federal entity, but actually a collection of private banking interests that are more concerned with their own accumulation of wealth than the common good of the nation.

I think the author would contend that oil, iron ore, Forests and fresh water could be better conserved and managed by elected officials who where accountable to the public than to private corporations who where only interested in short term profits and accountable to no one but a board of directors.

Actually, I'm not defending or critizising this author - I read the book but still have questions about her basic assertions. I would like to see some comment from TOD folks that seem to be very interested in this book a few months ago. I have friends who think the author is a fringe loony - but her arguments do see pausible.

Right. But private property owners can surely decimate the woodlands. And they are about it right now out here in the flyover outback.

When a land owner starts to get crunched by the economy and his spending power decreases or hard times come? What does he do?

He sells his timber. And right now its being cut down and hauled off in mass.

Makes sense does it not? What else can he do? He needs cash and the tress are there. Sell the suckers.

Right now we are in that decline period and right now the land is being raped and pillaged.

As the screw tightens even more,then more and more of natures assets will be decimated.

By the end times we will be looking at a barren wasteland of little value. I might state that without timber we will have absolutely NOTHING to fall back on. Nothing to build with. Nothing to heat with. Nothing to cook with.

There is still some greenery around but what it is is mostly junk trees. Sweet gum usually. The good woods are fast disappearing and have been for some time.

And also farmers sodbust more new ground and then with a trackhoe drive around the fence rows knocking done the trees and cover that once was allowed to grow there.

Wind erosion? They could care less. No more wildlife? They could care less. And as the crops suffer they will not add the nutrients to keep the fertility up. They will grab what they can and screw the rest and it starts to go downhill as the N,P,K prices rise higher.

What is my source for this? My very eyes. Also dodging big logging trucks constantly. Watching the maw of the paper mills stack up acres and acres of piles of pulpwood. Literally hundreds of thousand of logs awaiting the mill chipper to make asswipe paper and advertising brochures to fill mailboxes.

Nobody is really looking around. No one seems to talk about it. No one IMO really cares or perhaps they just see the shopping malls and major traffic. Never go into the wooded areas out here where some of us hicks live.

Drain the ponds. Bulldoze the land. Kill the wildlife. Spray enough chemicals to kill off what is left.

And could Big Gov do something about it? I believe the 'sod buster' regs have been shitcanned along with HEL regs and about all the rest. Where did you go USDA? Oh hunkered down with your eyes shut.

We are busying taking this planet apart. Tree by tree. Wild species by species. Insect by insect. Bird by bird.Fish by fish.

Each year it speeds up. Who will speak then for the earth?
Obamugh? I don't THINKKKK SOOOO.

I not only find it to be valid, but there are historical examples that parallel the same thing. Look at China when Marco Polo visited. The emperor created fiat currency as "legal tender" (under threat of death if you refused it) and thus it was used. China suffered inflation from this, as has happened with every fiat currency throughout history but the emperor didn't end up owing a cabal of bloodsucking vampire squid bankers.

The notion that modern nation states require central banks is a myth fostered by the bankers themselves, because a central bank is, well, central to how they enrich themselves. Central banks create money out of thin air, just as a government bank does, but then "loans" it to the government that wishes to "borrow" it. The borrowing government issues "bonds" that it never intends to really repay, just rollover.

The primary reasons that these extra steps occur is (a) to obfuscate the simple creation of "money" out of thin air so that common persons like you will be left with the impression that only brilliant, life-long dedicated "economists" can possibly understand these vast complexities, even more vast than particle physics, and to (b) add in a step whereby the central bank can then use the "bonds" as collateral for further "loans" to commercial banks to inflate the money supply.

You don't have to believe me but you can read the words of Senator Aldrich or the 6 bankers who accompanied him to Jekyl Island off the coast of Georgia in 1910 to write the draft of what would become the legislation that created the Federal Reserve. You can read their own words, describing their "conspiracy" (their term, not mine) to form this "cartel" (their term, not mine) under government auspices to enrich themselves at the expense of everyone else and to ensure that any losses would always be born by the taxpayer but all profits would be kept by the banks. (Note that this was restricted to only the biggest and wealthiest of banks, with smaller banks simply being pawns in the game.)

Or, you can ignore their own words and believe the bullshit you are taught in public education and which tools like Bernanke spout when the "independence" of the Fed is even questioned.

Your choice. You can take the blue pill, wake up in your bed, and believe whatever you want to believe, including the modern mythology in which you've been thoroughly indoctrinated. Or you can take the red pill and see how deep this rabbit hole really goes. But let me warn you, the real world is not what you've been spoonfed in schools.

P.S. The derivatives mess has been tried before. That ended badly too. See the commercial empire of Venice for precedents, roughly 1300-1500.

P.P.S. If you want more direct quotes from the bankers themselves, start by reading The Creature from Jekyll Island : A Second Look at the Federal Reserve by G. Edward Griffin. There are more books out there that document the truth, in the very words of those men who did the conspiring. But that one is an excellent starting point. But the point of a central bank is never, ever to stabilize prices and ensure full employment (the twin promises of the Federal Reserve). The real goal of central banks is always to enrich the bankers at the expense of any and everyone else. And when you finally understand the real purpose of central banks, the purpose of loans like those for Dubai World become crystal clear, regardless of how idiotic the loan actually is.

I see the possibility of a sudden reduction in imports at some point (hopefully many years off). This reduction in imports is likely to loop through the system quickly, making manufactured goods that require imported components not available either. As a result, many things we are accustomed to buying now are likely not to be available at any price.

In such a case, I am not sure the inflation/deflation question is even the right question to ask. If there is any amount of money, but very little to buy, this would seem to make for "inflation," but it could just as well lead to governmental collapse and barter.

I was under the, perhaps incorrect assumption, that most people had already written off Dubai's economy? From reading and conversations I had some 18 months ago I know I had. For this reason I expected any smart money to have left Dubai long ago so the direct impacts of this on Western economies should be minimal. Hmm... that does also assume Western creditors are 'smart money', oh.

I think you hit it on the head in regard to the indirect fallout from this. To me it's just another hole in the bucket so to speak. The global bucket can only sustain so many holes before the bottom falls out and a new bucket will be need to replace it.

What I want to know is 'will the UAE build another Dubai when this one has gone rusty?'.

I visited the place in the late 70s and was appalled by the slave culture and shoddy construction then.

It is a city built of reinforced concrete on salt desert with almost 100% humidity. A 70s guide book described the climate as 'bloody awful'.

In these circumstances you are supposed to make sure that the reinforced concrete is totally salt-free. All the salt must be washed off the reinforcing bars with fresh water and the concrete mixed with fresh water. If you don't the humidity will rust the reinforcement, expand the bars and crack the concrete. I saw a brand new block of flats with concrete already spalling off the front and a flag draped over it to hide the fact.

I don't think much has changed.

But... according to the BP stats the reserve/production ratio for UAE's oil is nearly 90 years. So when this current Dubai has decayed into a rusty heap (in a about 30 years) will they bother to build a new one?

Or from an investment point of view, what is the total Net Present Value of a whole city that may just fall down within a few decades?

Just check the most important sentence of the year. And further discussions are useless.

Colin Campell (15th of November 09):

"Given the central role of oil in the modern economy, the peak of production promises to be a turning point of historical magnitude. It seems that banks have been lending more than they had on deposit, confident that Tomorrow’s Economic Growth was collateral for Today’s Debt, without recognising that the expansion was fuelled by cheap oil-based energy."

I saw a report from CNBC Sunday night about Dubai. Super foxy Erin was reporting live from the very place itself, and saying it is poising itself as the Caribbean of the Middle East for the wealthy in the region including Europe. She reported Dubai had 200,000 shoppers on Saturday.

The stock market didn't get too out of whack on the news and today its flat. I don't see this default as being a harbinger of bad things to come. They may even pick up the payments anew 6 mo's hence.

Also see the economy roaring back for the next couple of years, raising oil demand but only to then again squeeze oil supply, raising prices and causing yet another cataclysmic drop in equities. That is unless all these stories of NG discovery are accurate and there is a conversion of some percentage of transport to CNG & LNG, then reduced oil demand could avert crunch until later. But at some point oil depletion will come back to roost and cause a sharp contraction.

I'm very uncertain about your analysis, but I think you have articulated the prevailing wisdom.

economy roaring back for the next couple of years

Are you willing to go long on QQQQ or DIA to put some teeth into your analysis? A trigger like the Dubai issue might easily spook a lot of investors after the nice run up since March. This could significantly dampen the "roaring" part.

I wish I had that crystal ball for the stock market - but it seems that a short position might serve well in the not-to-distance future.

Not that confident in Dubai, but also not in any equities for now. Just too volatile and risky, even though economy is making a comeback. The problem is, what if you're in stocks and Israel suddenly busts a move on Iran? What if commercial real estate goes bust? What if the truth about oil peaking 05-08 comes out in mainstream news? Lots of risky reasons that could cause equities to dump.

I've got cash float in my own business play, which could go big. That's enough risk for now. Best of luck to you if you're in QQQQ & DIA.

You are missing the point, Alan. It doesn't matter if the debt is sovereign debt or not. The entire point of this play by the banks (aka the "investors") is to try to force Abu Dubai into making it into sovereign debt and then to be responsible for it. Fannie Mae and Freddie Mac even carry explicit statements (even today after they have been nationalized!!!) that they are not backed by the US government. Yet the banks bamboozled the politicians into picking up the Fannie and Freddie tabs anyway. They were simply trying to coerce Abu Dubai into picking up the Dubai World mess and making the BANKERS whole rather than forcing them to take the losses.

P.S. Watch these same bankers turn to their national governments in the US and Europe to bail them out because of "systemic threats" to the financial system.

Through 28-30 November the media's chosen commentators were able, within their capabilities to breathe life into a dead fish, to talk up Dubai's maximum exposure to loss, or maximum possible default on loans made by its creditors as hitting $80 to $90 billion. By November 30th this was whittled down to around $ 30 bn, and today 1 Dec it stands at around $ 26 billion. Abu Dhabi probably already stepped in, as they say. Even if it didnt, that has no importance.

Using various estimates from sources such as IMF, Reuters, Bloomberg the world's bank, finance and insurance sector lost about $ 1 700 billion in the 12 months to Oct 09.

How does another $ 26 bn compare with that ?

Allowing the future value of Dubai's office and building projects to shrink even more would be insanely unproductive for exposed lenders and suppliers, from banks to construction companies, to offshore dredging operators who keep Dubai World above water (and burn a lot of oil doing it).

So the "Dubai finance meltdown" music is now played in reverse. Everything OK !

I recall reading comments by people like you after Ben Bernanke claimed the sub-prime crisis was "contained" - that it was all over and on to happy days again. That turned out really well too, didn't it?

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